Many self-directed investors like to buy blue-chip issues: high-value stocks that regularly pay dividends, and whose companies are so integral to the global economy that holding them seems as safe as putting money in the bank, with much better returns practically guaranteed.
Not so fast.
In 1999, we got a stark reminder of the fallacy of such assumptions. It took down a company whose divisions were so ubiquitous across the American landscape that they conjured a sense of permanence rivaled only by major geographic features. There was the Mississippi River. The Rocky Mountains. The Grand Canyon.
And there was General Electric.
For 111 years, GE was one of the several companies whose performance was gauged by the Dow Jones Industrial Average (DJIA). It practically defined the term “blue-chip stock.” Yet in June of 2018, it was removed from the DJIA, and as I write, GE stock sits at less than 25 percent of its August 2000 high. Some are now wondering if the company itself will survive.
What happened?
Across those years on the Dow, GE successfully diversified into smaller sub-companies within the (much) larger parent organization. Those multiple business lines touched, quite literally, every sector of the global economy. GE’s wide range of markets was a primary reason it kept its place on the Dow.
It was also why many saw GE as a no-lose investment. In one company, they reasoned, they could achieve the kind of diversification that assures stability in bad times and growth when times are good. Those who work for a titan of industry like GE, and acquire company stock regularly as part of their 401(k), can be even more susceptible to notions of “their” company’s invincibility.
And thus the trap is set. I refer, of course, to the all-your-eggs-in-one-basket trap.
General Electric stock began a steady climb in the mid-90s, topping out in August 2000 at $58.17 a share—a more than threefold increase in just over three and a half years. But what the average self-directed investor did not know was that the majority of GE’s profits were coming from just two of its divisions. It only took the failure of only one, its financial services side, for GE’s share value to plummet.
Those heavily invested in the company paid dearly. I share the story of one such investor in my book, “You’re Retired. Now What?” It also details the contrarian approach I take to structuring strategic investment portfolios which are truly diversified. It is no easy job, but I do it with one objective in mind: protecting and growing my clients’ wealth.
You can learn more about the book here.
